A November 23, 2008 Washington Post story reports that lax oversight by the Office of Thrift Supervision (OTS) allowed the savings and loan institutions it regulated to engage in dubious practices which led to $355.7 billion in thrift failures in 2008 and the need the to sell off other institutions to avoid failure. Thrifts are usually smaller than commercial banks and concentrate more on home loans. Even so, some of the names of institutions which failed or were sold are well known: IndyMac, Washington Mutual, and Countrywide, for example (see item 87).

Across the board, the Bush Administration aggressively deregulated financial markets. At the OTS this strategy was spearheaded by James Gilleran who headed the agency from 2001-2005. In his first 3 years, he cut OTS’s 1,200 staff by a quarter even as the value of the assets the agency oversaw increased by half. Banks were also allowed to draw down their reserves on average by a third to the lowest level in 20 years. To justify this, the OTS accepted unrealistic projections on what expected losses in the banks’ loan portfolios would be. At the time thrifts were making more and more higher risk adjustable rate mortgages (ARMs), the OTS permitted them to assess the risk of these in terms of their introductory low rate and not the higher rate to which the loans would ultimately convert. And no, these loans were not being to the poor. As part of Gilleran’s deregulation, government obligations to lend in low income communities were not strictly enforced.

The structure of the OTS was also at odds with its mission. It had an inherent and fatal conflict of interest. It was funded by the very banks it was tasked with regulating. The bigger the bank the bigger the contribution. So although the OTS oversaw some 750 banks, Washington Mutual (WaMu) alone paid 13% of its budget. The mortgage writer Countrywide which was actually recruited by the OTS to become a thrift on the promise that it would be loosely regulated accounted for another 5% of the OTS budget.

In short, the thrifts were paying the OTS not to regulate them, and in exchange for the budget it received from them the OTS turned a blind eye to their reckless behavior. This arrangement worked out very well until the thrifts crashed and burned. Who could have predicted . . .?